Arkansas economy to see modest growth ahead after putting ‘double-dip’ recession behind

The Arkansas economy suffered a “double-dip” recession in 2012 and will likely see a revision in historic employment numbers posted earlier this year, an audience of more than 100 business leaders learned at the annual Little Rock Regional Economic briefing held at the Clinton Presidential Center.

Along with predictions of tepid economic growth over the next few years, those were a few of the highlights at Wednesday’s (Nov. 16) annual economic forecasting event hosted by the Little Rock branch of the Federal Reserve Bank of St. Louis and the Institute for Economic Advancement at the University of Arkansas at Little Rock.

During the two-hour event, economists Kevin Kliesen and Michael Pakko discussed state and national economic conditions, respectively, and offered dour assessments of the business growth over the past five years that included a few noted surprises and an outlook for more of the same.

Kliesen, research officer and business economist for the St. Louis Fed’s Eighth District, first offered a 30-minute account with a “big picture” view of the U.S. economy. The Fed economist, who also gathers anecdotal data for the Federal Reserve’s regional Beige Book, said his internal projections see “unofficial” 2.5% GDP growth in the fourth quarter and about 2% for the second half of 2016.

“That’s well above the 1% growth we saw for the first half of the year,” said the St. Louis-based economist of real U.S. Gross Domestic Product, or GDP, the broadest measure of the nation’s business activity.

Concerning the outlook for 2017 and beyond, Kliesen said it would be difficult to offer predictions concerning the economy under President-elect Donald Trump until some of his policies are implemented. Still, Kliesen said his boss, St. Louis Fed President James Bullard, recently gave a presentation saying the consensus on the U.S. economic outlook has not changed since President-elect Donald Trump won the Nov. 8 election.

“I am going to go with that,” Kliesen said jokingly.

ST. LOUIS FED SEES 94% CHANCE FOR RATE HIKE
On other major segments of the world’s largest economy, Kliesen said the U.S. labor market is healthy, long term interest rates are in a holding pattern, and expectations of the 2% inflation target are rising.

“Obviously, if inflation expectations continue to rise that is going to be something that causes the Fed to stand up and take notice,” Kliesen said.

Kliesen said the St. Louis Fed’s own internal calculations estimate that the federal funds interest rate, which now stands at 0.25% to 0.50%, has a 94% probability of rising at the Federal Open Market Committee’s final 2016 meeting on Dec. 13-14.

“We’ll see what happens, but again that is market-based expectations,” he said. “But regardless of what happens in December, I think the (FOMC) has tried to indicate that monetary policy is based on where we stand now in our forecast while we are being very accommodative for the foreseeable future.”

Kliesen then spent the rest of the presentation providing a snapshot of “4 things” that everyone needs to know about the U.S. economy: the U.S. economy is at full employment; GDP growth has slowed to its weakest level since the 1930s; the nation is experiencing a prolonged period of low productivity; and low inflation is the “new norm.”

Over the next three years, Kliesen predicted real GDP growth will remain around 2%, the nation’s jobless rate will average about 4.75% and headline inflation will remain at the current target rate of 2%.

ECONOMIC DATA MISSES ARKANSAS RECESSION
In looking at Arkansas, Pakko forecasted that the state’s business growth would remain flat to modest over the next two years. Yet he did reveal some unexpected observations that shed light on post-recession economic data on the Arkansas economy that has been in question.

For example, in a chart comparing U.S. and Arkansas GDP growth from 2007 to 2015, the UALR economist noted that the state slightly outpaced the rest of the nation by a rate of 9.7% versus 8.3% over that period.

“By this measure, Arkansas seems to be doing pretty well,” Pakko said. “The big share of that, however, is the fact that the recession did not hit us as hard as the rest of the country.”

But Pakko noted that he believes Arkansas suffered a second recession during a period of negative growth in 2012, nearly three years after the nation’s Great Recession ended in July 2009.

“If we look at the quarterly growth rates in 2012, we actually saw a negative growth in three of the four quarters,” said the UALR economist, pointing to a striking dip in his chart. “It may be a judgment call, but if we look back at 2012, we pretty much have to call that a local recession because Arkansas’ economy was contracting that year and into 2013. So, to some extent, we had a ‘double-dip’ recession.”

Concerning the state’s strong employment picture today, Pakko said that Arkansas lagged well behind the rest of the U.S. in total job growth and unemployment rate until 2014.

“My outlook is going to be pretty much more of the same: slow but steady growth moving forward,” he said.

However, Pakko said Arkansas saw three straight months of employment growth and over 10,000 jobs in the first quarter of 2016, the only time monthly growth had exceeded those levels since the Great Recession began in 2007. In the same quarter of this year, Arkansas’ jobless rate fell below 4% for the first time in state history, sliding to an all-time low of 3.8% in May. Pakko also said state unemployment data compiled by the U.S. Bureau of Labor Statistics (BLS) does not accurately measure missing Arkansas workers that have dropped out of the workforce.

“The unemployment rate is giving us a different (reading) than it has in the past concerning labor force participation rate,” Pakko said, adding that he expects the jobless rate and total employment figures to be revised slightly downward by BLS when it updates 2015 and 2016 data early next year.

“When it come to the (BLS) revisions, basically we are looking at about 5,000 jobs that were over-counted, which is pretty small,” he said. “The good news is that the revised data will show we had stronger growth in the goods-producing, particularly in the construction and manufacturing sectors.”

ARKANSAS TO SEE GDP GROWTH THROUGH 2018
In his outlook for the Arkansas economy, Pakko expects payroll employment will see moderate growth levels near 1% through 2018 with the service-sector industries adding the most jobs. Robust expansion in the professional and business, education and health, and leisure and hospitality super sectors will continue, while manufacturing will follow its current negative growth pattern.

Pakko also said Arkansas GDP growth will continue to move upward, rising annually to 2.6% in 2017 and 2.8% in 2018, respectively. Pakko said business growth in Arkansas will end fiscal year 2016 at 2.4%, up from last year’s weak 1.3% GDP expansion.

In other categories, the UALR economist said personal income growth in Arkansas will also continue on an upward trend, jumping to 3% and 3.5% annual growth in 2017 and 2018, respectively. That compares to a 1.5% personal income hike in 2015 and an expected 2.7% annual growth rate for fiscal 2016.

Retail sales are also expected to see modest growth in taxable sales through 2018, while home sales will likely decline from a robust annual growth of 10% and 8.7% in 2015 and 2016, respectively. Pakko said Arkansas home sales will remain steady at 8.4% in 2017, but likely see a steep decline to only 0.2% in 2018 as higher interest rates take the steam out of growth.

Lastly, Pakko said the state’s unemployment rate over the next two years will move closer to the U.S. jobless rate, which fell to 4.9% in November. The UALR forecaster predicts the state’s low unemployment levels will rise to 4.3% and 4.4% in 2017 and 2018, respectively.